Lottery Winners Should Choose the Annuity, Not the Lump Sum

Every few months our country goes through “Power Ball Fever” where the uninformed, the uneducated, the dreamers, and my father stand in line to be the one who wins the jackpot. I gasp in amazement every time I see those long lines. It is a fact that you have a better chance of getting hit by an asteroid or getting killed driving to the convenience store to buy a ticket than actually winning the lottery. So what gives? Are we a land of idiots and people who ignore the simple math of probability? The unfortunate answer is probably yes on both of those points.

Winners Who Choose the Lump Sum Instead of Annuity Payments End up Bankrupt

I live in the state of Florida where lottery fever happens on a daily basis. There is a ping pong ball drawing on TV every night, and I’m sure there a ton of dreamers who tune in with a ticket in hand. There is a dark side to this lottery madness because most lottery winners end up squandering away the money. It’s pathetic. People win, take the lump sum, and then file bankruptcy a few years later. It’s actually predictable when you see the interview as they hold up the over-sized check. You can hear the bankruptcy clock ticking.

Here’s the mistake that most people make: they take the lump sum instead of the ​lifetime payout! It’s the dumbest move ever. Let me explain.

When someone wins the lottery, I can only imagine the line of family and “friends” at the door with their hands out. That’s how the march to bankruptcy begins. When you take the annuity lifetime income stream instead of the lump sum, you are placing annuity handcuffs on these ungrateful beggars. Yes, they will show up every year for the rest of your life when your annuity payment arrives, but at least that will be a contractual filter.

Common wisdom from all of the financial pundits, planners, and stock market “masters of the universe” is that you should ALWAYS take the lump sum if you win the lottery. They will argue that choosing an annuity lifetime income stream will never beat a well-planned asset allocated portfolio. In theory, that is a correct statement, but life is rarely lived “in theory.”

A Lottery Winner's Annuity Payments Are Contractually Guaranteed, Not Theoretically Available

My cogent argument is that the lifetime income stream is a more prudent choice because it is contractually guaranteed. Also, in many cases, you have the choice to set up the income stream to pay for the life of your spouse or for a “period certain” that is much longer than your life expectancy.

Handcuff Yourself to a Stable Future With Annuity Payments, Not a Lump Sum That Can Go up in Smoke

Choosing a lifetime income stream over a lump sum certainly “handcuffs” your family and friends. It also handcuffs the lottery winner and protects them from their own stupid decisions as well. I’m sure that if you won the lottery, you would be totally prudent and pragmatic with all of your money decisions. Yeah right!

Handcuffing yourself makes sense, and your real family will thank you for it. I know that’s not the choice your ego wants to go with, but winning the lottery is a one-time shot that too many people screw up by taking and then blowing through the lump sum.

You don’t have to win the lottery to learn from the mistakes of past lottery winners. Guarantees are always good. Contractual guarantees are better. Contractual lifetime income guarantees are the best. Remember this the next time you look at your portfolio if you are shouldering all of the risks of outliving your lump sum.